Limited looks abroad to help lift profit

NEW YORK (MarketWatch) -- Limited Brands Inc. announced Tuesday plans to test the international retail waters by opening Bath & Body Works stores in Canada next year as the retailer faces increased competition in the U.S.

Limited Brands currently does not operate any of its Victoria's Secret and Bath & Body Works chain stores overseas.

"The next new frontier is international," Chief Executive Leslie Wexner said Tuesday at Limited Brands' analyst meeting in Columbus, Ohio, standing before a map of the globe with the words "The New Limited Brands." "We are beginning to press on with international expansion."

Wexner didn't specify how big he expects the company's international operation to be, except to say best brands have the potential to grow their international business equal to the size of the domestic market.

Limited in January bought Canadian lingerie retailer La Senza to help it gain reach in almost 40 countries. The company's focus on the international market comes as it faces increased competition in the U.S., where retailers including J.C. Penney Co. and Gap Inc. launched their own lingerie lines or expanded in personal-care products, investors said.

Limited last week trimmed its profit forecast after posting disappointing September same-store sales at both Victoria's Secret and Bath & Body Works.

"The biggest issue for them is going to be products," said Malcolm Polley of Stewart Capital Advisors, which sold Limited shares three weeks ago on concern the company is facing increased competition. "It makes sense internationally, but a product that works well in the U.S. doesn't necessarily translate to the global markets. They've got to get the products right."

Expanding overseas may benefit Limited as the U.S. dollar declines against foreign currencies such as the euro and the Canadian dollar, Polley said. That helps boost sales when overseas revenue is translated back into the dollar, he said.

Holiday outlook

In addition to overseas expansion, Limited also plans to open or remodel both Victoria's Secret and Bath & Body Works chains in the U.S. and expand in labels such as Pink and Victoria's Secret Sport and categories including beauty products, handbags, eyewear and jewelry that generate higher profit margins. The company aims to increase per-share profit at least 12% a year.

The company's same-store sales have slowed after declining traffic at both its Victoria's Secret and Bath & Body Works chains led it to increase discounts and promotions.

"We are better led and better planned than we've been going to the holidays," Limited's biggest selling season, Wexner said at the analyst meeting. "I feel very confident and at ease going into this holiday. We have no overhangs or distractions."

Limited this year exited its apparel units -- Express and Limited Stores -- to focus on selling lingerie, personal care and beauty products, items that Wexner said gain more customer loyalty and predictable revenue than apparel.

International plan

The company has started carrying Victoria's Secret beauty products at 250 La Senza stores and plans to test open Bath & Body Works stores in Canada in late 2008. La Senza has more than 730 company owned and licensed shops.

"We see $11 [per share] in potential incremental value from monetizing the international opportunity," analyst Todd Slater of Lazard Capital Markets wrote in a note. "With the acquisition of La Senza, [Limited] more than dipped its toe in the water."

Limited plans to rely on franchising or joint ventures, models that require small infusions of capital, to open Victoria's Secret and Bath & Body Works stores outside of the United States, Martyn Redgrave, executive vice president and chief administrative officer, said in the meeting.

Operating under a franchise or licensing model would allow Limited to collect four types of revenue, including up-front development fees for exclusive rights to a region or territory, as well as sales-based royalty fees that could be about 7% to 8% of sales, Slater said.

Bigger stores at home

Limited generates more than $630 million of sales outside of the United States, which executives said are profitable. That's about 6% of the average estimate of $10.6 billion in sales the company is expected to garner this year, according to Thomson Financial.

La Senza represents 73% of the company's international sales, or $460 million. The rest comes from selling Victoria's Secret beauty products at duty-free shops and international-catalog orders that the company said come from about 160 countries in the world.

Limited plans to increase Victoria's Secret's square footage by 8% to 10% annually, with both new locations and remodeled stores that will be 50% larger. Bath & Body Works' square footage will increase by 6%, mostly through new shops to be opened outside of malls. Sales in 63 remodeled Victoria's Secret stores have risen 35% from last year, according to the company.

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